Employment contracts come in all shapes and sizes, such as zero-hours contracts, flexible working arrangements, or temporary employees. But one type of employment contract that’s highly popular is an annualised hours contract. This involves distributing agreed-upon annual working hours unevenly across the year. It allows for adjustments based on workload fluctuations, typically offered by companies that experience seasonal demand or project-based work.
In this article, we’ll explain annualised hours contracts, how they work, and how to know if they’re a good fit for your organisation.
What are Annualised Hours?
Annualised hours refer to a flexible type of employment contract where an employee’s working hours are calculated annually rather than weekly or monthly. Essentially, instead of adhering to a fixed weekly schedule, employees agree to work a certain number of core hours over the course of a year, with the distribution of those hours varying throughout different periods.
The striking feature of annualised hours contracts is that they adapt working hours to accommodate fluctuations in demand, workload, or seasonal variations. The agreement typically outlines the total number of hours the employee is expected to work over the year, but the specific schedule may vary from week to week or month to month. But for employers, this may be the dream scenario, as they can better match workforce availability with business needs.
In practice, during busier periods, employees might work more hours, while during quieter times, they may work fewer hours, which is particularly beneficial for industries or companies with cyclical patterns of demand or project-based work. It provides a level of adaptability for employers to manage resources efficiently and for employees to maintain a work-life balance.
What is an Annualised Salary?
An annualised salary, or annualised pay, refers to the total amount of money an employee earns over the course of a year. This form of compensation is often used for salaried positions where employees receive a fixed amount of pay regardless of the actual number of hours worked each week or month. The annualised salary is calculated by multiplying the employee’s monthly or weekly salary by the number of pay periods in a year. So, while annualised hours focus on the variable aspect of working time, annualised salary focuses on the fixed aspect of compensation.
Sometimes, an annualised salary may be combined with an annualised hours arrangement. For example, an employee on an annualised salary might have the flexibility to work varying hours each week based on business needs, with the assurance of a consistent salary at the end of the year.
What is an Annualised Contract?
An annualised contract is an employment agreement that outlines terms and conditions where an employee’s working hours, pay, and other employment-related factors are calculated annually. This type of contract flexibly distributes working hours across different periods within the year, allowing for variations in workload or seasonal demands. An annualised contract often provides adaptability for both employers and employees in managing work schedules and ensuring that compensation aligns with the actual time worked.
How do you Calculate Annual Hours?
Calculating annualised hours involves determining the total number of hours an employee is expected to work over the course of a year while allowing for flexibility in how those hours are distributed across different periods. Once you’ve got the numbers down, divide the total annual hours by the number of distribution periods in a year.
For example, in the UK, the average annual hours worked in 2022 was 1522. Say the distribution is monthly. Then, the regular hours per month would be 126.83 hours.
If the employee works more hours than the regular agreed-upon annual hours, determine how overtime is handled, whether it’s through additional pay, time off in lieu, or other arrangements specified in the employment contract.
Pros and Cons of an Annualised Hours Contract
Annualised hours contracts offer employers a valuable tool for adapting to fluctuating workloads and seasonal demands, which is a great way to efficiently manage staffing levels based on the ebb and flow of their operational needs, reducing the need for excessive overtime or the costs associated with hiring additional staff during peak periods. These contracts also give employees the freedom to allocate their time more flexibly, accommodating personal commitments or lifestyle preferences.
However, annualised hours contracts come with their share of challenges. The variability in working hours may result in employee income fluctuations, introducing budgeting and financial management complexities. Employees may face the risk of overwork during busy periods, potentially leading to burnout or strained personal lives. The calculation of pay under such contracts can also be intricate, posing administrative challenges for employers, and effective communication becomes paramount to ensure both parties are aligned on expectations.
As with many HR decisions, introducing annualised hours requires heavy thinking.
How do you Calculate Annualised Hours Holiday Entitlement & Pay?
Calculating annualised hours holiday entitlement and pay involves a pro-rata approach, considering the flexible nature of these contracts. Begin by determining the statutory minimum holiday entitlement per year based on the UK’s labour laws. Adjust this entitlement for part-time or full-time status, and then calculate a pro-rata entitlement based on the percentage of full-time hours worked.
For example, if an employee works 80% of full-time hours, their holiday entitlement would be 80% of the standard minimum.
When determining holiday pay, establish a calculation method based on factors such as average weekly earnings or a designated reference period, and consider any overtime or additional payments regularly received by the employee.
How to Create an Annualised Hours Policy
If you or your organisation are considering introducing annualised hours for your workforce, there are a few key steps that you should take before the go-ahead. Here are a few key things to keep in mind when pursuing this avenue:
- Define the Annual Working Hours: Establish the total number of hours employees are expected to work in a year.
- Determine the Distribution Period: Decide the timeframe over which the annual hours will be distributed, which could be weekly, monthly, or quarterly, depending on the nature of the business and the agreement between the employer and employee.
- Specify Flexibility and Adjustments: Clearly articulate the flexibility in working hours and the conditions under which adjustments can be made. Define how employees can request schedule changes and how the approval process works, ensuring fairness and transparency.
- Calculating Pay and Benefits: Specify whether the annual salary is fixed or if it can be adjusted based on variations in working hours. Include information on how benefits, such as overtime pay or additional allowances, will be handled.
- Overtime and Additional Compensation: Outline the policy regarding overtime payments, detailing which options will be available and addressing any circumstances where additional compensation may be applicable, such as working on holidays or weekends or annual holiday entitlement.
- Communication and Record-Keeping: Emphasise the importance of effective communication between employers and employees regarding schedule changes, adjustments, and any other relevant matters, including the record-keeping procedures for tracking actual hours worked, holidays taken, and any deviations from the agreed-upon schedule.
